BOE unruffled by China, market turmoil

By Paul Hannon

Published: Sep 10, 2015 7:25 am ET

The Bank of England remains on track to raise its benchmark interest rate next year, with rate setters agreed that signs of a sharper than expected slowdown in China and turbulence in global financial markets haven't as yet altered the outlook for the U.K. economy.

At their gathering Tuesday and Wednesday, eight of the Monetary Policy Committee's nine members voted to leave the central bank's benchmark interest rate at a record low of 0.5%, where it has been since March 2009. It also left its stock of bonds unchanged at GBP375 billion ($577 billion).

One member, Ian McCafferty, voted to raise the rate to 0.7% for the second meeting in a row.

According to minutes of the meeting released on Thursday, MPC members agreed that it was "premature" to draw firm conclusions about the impact on the U.K. of developments in the global economy, but acknowledged that "downside risks" had increased.

"Global developments did not yet appear sufficient to alter materially the central outlook...but the greater downside risks to the global environment merited close monitoring for any impact on domestic economic activity," the minutes said.

MPC members agreed that it was too early to judge how well Chinese authorities would cope with slowing growth and declining stock markets.

"The Chinese authorities were managing a complicated economic transition, and some volatility during the adjustment process was to be expected," the minutes said.

In its quarterly inflation report, published last month, the MPC signaled it was on course to raise its benchmark rate early next year. The minutes indicate recent developments haven't altered its views.

If it were to tighten next year, the BOE would likely be following in the footsteps of the U.S. Federal Reserve. While officials at the U.S. central bank appear on track to raise rates this year--after September, there are Fed meetings in October and December--their recent remarks in interviews and elsewhere showed divisions and uncertainty that could restrain them from moving on rates as soon as next week.

Rate rises by the Federal Reserve and the BOE would widen the divergences in the monetary policies of the world's largest central banks. The European Central Bank last week signaled it is prepared to expand its already massive bond-buying program. The Bank of Japan is also buying large amounts of assets, mostly government bonds, although additional easing appears unlikely for now. And the People's Bank of China is lowering its benchmark rate in an effort to prevent a hard landing for the world's second-largest economy.

Underscoring that divergence, New Zealand's central bank Thursday cut its benchmark interest rate to 2.75% from 3.0%, and left the door open to further easing.

"It's very odd for the Anglo central banks to decouple completely from the rest of the world," said George Goncalves, Head of U.S. Rates Strategy at Nomura.

According to the minutes, MPC members expect the near-term outlook for inflation to be much as it was in August, although some of the eight members who voted to leave policy unchanged saw a risk that consumer prices could rise more rapidly than expected over the medium term.

They also stuck to their forecast for a continuation of the U.K.'s solid economic recovery, despite recent signs of weakness.

Surveys and data released since August have suggested that growth may have slowed in the third quarter, with a measure of August activity in the dominant services sector falling to its lowest level in over two years while industrial output fell in July on lower exports.

The minutes reported that the BOE's economists have lowered their forecast for third-quarter growth, but MPC members agreed the outlook remained "broadly similar" to their August forecasts.

Write to Paul Hannon at paul.hannon@wsj.com and Jon Sindreu at jon.sindreu@wsj.com